3 tips for staying on your game through the process
Let’s say you have made the decision to raise some money from investors to grow your startup. I was speaking with an entrepreneur the other day who asked how they should get ready for due diligence (DD). While it depends on what stage you are at (early/idea = lighter DD vs. scaling/Series C = heavier DD), here are a few things to think about:
The more preparation you do up front, the easier it will be to stay ahead of the diligence process. Setting up a data room allows you to post everything in one place vs. getting lost in many emails to different investors. Depending on your stage, there may be more/less info to initially load into the data room. Even at an early stage, you should probably have a pitch deck, financial model, product demo, operating agreements, and cap table ready. As you gain more traction, you can also have some additional things like customer/financial data, NPS/customer survey results, org chart, etc. Having these prepared in advance can limit the amount of one-off requests you may get in the future and also makes you appear organized. As a bonus, in the process of preparing you will likely uncover something you need to clean up before starting the fundraising process.
Different types of diligence at different times
Under due diligence, some things are more customer-related (value prop, customer conversations), financial (models, historical/projections), strategy (market, go-to-market process), and legal (incorporations, IP, key agreements/contracts). Within DD, some of these will happen before/after a term sheet. You also may want to save certain information until the investor is more serious/further along in the process. Just be aware that all of these requests are likely coming at some point and some level of depth, so level setting with firms what their DD process is like will help you manage timelines and expectations. This can be a very time consuming process that takes you away from your current business.
Pay attention to working styles
I have spoken with entrepreneurs that have had great DD experiences, as well as others that have horror stories working with investors. Remember, the investor is trying to sell you just as much as you need to sell them. Pay careful attention to how the interactions go: Are they transparent? Are they focused on things that matter or boiling the ocean with endless requests that don’t appear relevant? Are they providing unrealistic time frames to make you work all night to turn something around? Are they trustworthy? If the investor behaves a certain way now, that is a good indication of what it may be like to work with them in the future.
Don’t forget that to attract investors it helps to be solving a must-have problem in a growing market with authentic demand. Obviously for later stage companies there is much more data and a longer diligence process. But for an early stage founder, it still helps to be prepared and run a smooth DD process with investors you want to work with for the next 7-10 years.